How Does the Conditional Quantile Dependence in the FOREX Market Change Depending on the Time of Day? Analysis Based on Ask and Bid Prices

30 Pages Posted: 12 Aug 2020

See all articles by Małgorzata Doman

Małgorzata Doman

Poznań University of Economics and Business

Ryszard Doman

Adam Mickiewicz University, Poznań

Date Written: July 15, 2020

Abstract

In the paper, we show that estimates of the strength of linkages between the exchange rates EUR/USD, AUD/USD, GBP/USD, and NZD/USD below small or above large quantiles de-pend on the time of day, at which the daily returns are calculated. We argue that this is due to the activity of traders in different parts of the world, and the impact of the information flow. We use daily returns calculated for each hour of the day. The analysis is performed separately for bid and ask prices. We model the conditional dependence by means of bivari-ate Markov-switching copula models. Then, quantile dependence probabilities are calculated for the fitted conditional copulas. The models include copulas that can capture different types of asymmetry and tail behavior. Our results show that the applied dynamic dependence measures change significantly, depending on the hour of the day. The rankings of the strength of the dependence below small or above large quantiles, which we obtain using the model confidence set methodology, can be useful in portfolio risk management.

Keywords: exchange rates, major currencies, FOREX, bid, ask, linkages, quantile dependence, copula, Markov-switching model, model confidence set

JEL Classification: G15, F31, C58, C32

Suggested Citation

Doman, Małgorzata and Doman, Ryszard, How Does the Conditional Quantile Dependence in the FOREX Market Change Depending on the Time of Day? Analysis Based on Ask and Bid Prices (July 15, 2020). Available at SSRN: https://ssrn.com/abstract=3652092 or http://dx.doi.org/10.2139/ssrn.3652092

Małgorzata Doman

Poznań University of Economics and Business ( email )

Al. Niepodległości 10
Poznań, 61-875
Poland

Ryszard Doman (Contact Author)

Adam Mickiewicz University, Poznań ( email )

Uniwersytetu Poznańskiego 4
Poznań, 61-614
Poland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
21
Abstract Views
313
PlumX Metrics